City Lab with Laura Doering 20 September 2019
When it comes to business location, we typically think in terms of neighborhood—say in a downtown commercial corridor or a suburban office park. What we don’t think about is the floor a business is located on and how that might affect its success.
The reality is the floor a business occupies can matter significantly and in surprising ways.
A new study by my University of Toronto, Rotman School, colleague Laura Doering and Christopher Liu of the University of Oregon, finds that having a business located on the ground floor has a substantial effect on the earnings of poor women running home-based businesses in the developing world. To get at this, the study focuses on 1,800 or so people living and working out of a public housing complex in a medium-sized city in Colombia.
The allocation of apartments in the housing complex enables the researchers to conduct a natural experiment of sorts. The apartments are identical in layout, and randomly assigned. The only difference is which of the four floors these apartments are located on. Doering explains, “It’s not often that people are randomly assigned to housing. Because we usually choose where we live, it’s difficult to separate housing preference from entrepreneurial outcomes. In this case, the randomly assigned apartments provided a unique opportunity to isolate the effect of space on returns to informal business.”
The study looks at the effect of the precise floor where these home-based businesses are located on both the earnings of women and the gender gap in earnings between women and men.
Fifty-five people in the complex operated home-based businesses. The average age of the people who live in the complex is 35, and their average income is $126.56 per month—a little above the poverty line of $108.52 per month. Women slightly outnumber men, and roughly half the women in the complex are mothers with children living at home.
The study finds that being located on the ground floor has a substantial impact, both on women’s earnings and on the gender gap in earnings. Women with a ground-floor business took home almost three times more ($167 per month) than women running businesses on the upper three floors ($64 dollars per month) or women working outside the home ($60 per month). The extent to which that ground-floor location matters is substantial and surprising. What’s not surprising is that men in the apartment complex made more than women.
Colombia, like just about everywhere else in the world, suffers from a considerable gender gap in wages and earnings. This is especially the case for women with less skills, who have fewer and worse opportunities in the labor market. While less-skilled men are able to work as taxi drivers, street vendors, and construction, low-skilled women tend to work in domestic services and waitressing. And because women are responsible for children and housekeeping, especially in developing economies, they are considerably more likely to work from their homes.
Does the precise location of home-based businesses matter more for women than men?
Men with home-based businesses made more, $241 a month. While this was four times more than women running businesses on the upper floors, this gender gap narrowed to less than 60 percent for women with ground-floor based businesses. Indeed, the floor a business was located on made no such difference whatsoever for men, with no significant differences in men’s earnings whether they operated a home-based business on the ground floor, an upper floor, or worked outside the home.
For these reasons, the study argues, the precise location of home-based businesses matters significantly more for women than men. Women who lived in the ground floor were more likely to have food-related businesses that capitalize on foot traffic, while those on the upper floors were more likely to offer beauty services. And women were significantly more likely to have a home-based business if their apartment was located on the ground floor. Roughly 8 percent of women with ground floor apartments operated home-based businesses, double that of women on other floors (3.1 percent), and considerably more than men with ground floor apartments (2.8 percent) and men with apartments on other floors (1.1 percent). Women, more than men, were particularly attuned to locations that allowed them to start a business from home.
These micro-geographic resources were even more important for mothers. About half the women in the complex were mothers with children at home. Mothers were much more likely to operate home-based businesses regardless of what floor they were located on. Five percent of mothers on the upper floors operated home-based business compared to less than 1 percent of non-mothers. But nearly 14 percent of mothers with ground-floor apartments operated a home-based business compared to less than 4 percent of non-mothers. “The greater propensity among mothers to start informal businesses in both favorable and less favorable locations highlights the constraints mothers face,” the authors write. “With so few work options that accommodate child care responsibilities, mothers are more likely to run businesses at home even when these ventures generate little income.”
Ultimately, the study finds that location matters a great deal. Ground-floor locations provide critical “micro-geographic resources” of considerable benefit to women working from home. Some are obvious, like being in closer proximity to foot traffic. But others are less so—the ability to more easily access networks, gain access to information, and mobilize social capital. These are all things that help boost earnings and contribute to business success, which is especially important for mothers who have to care for children and have primary responsibility for maintaining the household.
Doering emphasizes that the results come from a single location and should be interpreted with caution. Nevertheless, she says, “I hope these findings encourage researchers and policymakers to investigate the effects of space on women’s earnings. The next step would be to see if these effects hold in other locations, like public outdoor markets.”
Laura Doering is a professor at the Rotman School of Management.